ECON 309 Biotechnology Companies Competition Policy Questions

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ECON 309 SPRING 2022
RESEARCH PROJECT STEP 1: BACKGROUND
DUE FEBRUARY 9, 11:59 PM (VICTORIA, B.C. TIME)
Note the later deadline when compared to the syllabus. (You can, of course, hand it
in earlier if you wish.)
By submitting this assignment you agree to the following honor code, and understand
that any violation of the honor code may lead to penalties including but not limited
to a non-negotiable mark of zero on the assignment:
Honor Code: I guarantee that all the answers in this assignment are my own work. I
have cited any outside sources that I used to create these answers in correct APA
style.
Marking scheme – Make sure you answer all the questions before handing this in!
Question
Question 1
Question 2
Question 3
(Q2 + Q3)/2
Question 4
Communication
Total
Out of
5
75
75
75
10
10
100
Your mark on this project is:
Q1 + (Q2 + Q3)/2 + Q4 + Communication
PROJECTS WILL BE MARKED AS SUBMITTED.
CHECK YOUR FILE UPLOADS!
1
Table of Contents
RESEARCH PROJECT STEP 1: BACKGROUND …………………………………………….. 1
Question 1: Choose a Topic ………………………………………………………………………………….. 2
1.a What’s your topic? (1 mark) …………………………………………………………………………………………… 2
1.b Why did you choose this topic? (4 marks) ……………………………………………………………………….. 2
Question 2: Write a “Backgrounder” for your topic ………………………………………………….. 3
2.a Background (Regular Question) …………………………………………………………………………………….. 3
Help and inspiration for writing a background …………………………………………………………………….. 4
Question 3: Defining the market…………………………………………………………………………… 5
3.a Market definition (Regular question) ……………………………………………………………………………… 5
Help and advice for writing your market definition ………………………………………………………………. 6
Question 4: Barriers to Entry, Round 1 …………………………………………………………………. 7
4.a Describe the barrier (5 marks) ……………………………………………………………………………………….. 8
4.b How effective is the barrier? (5 marks) …………………………………………………………………………… 8
Question 1: Choose a Topic
1.a What’s your topic? (1 mark)
Choose a topic from the ones available on Brightspace, or consult the instructor
(willmore@uvic.ca) to have a different topic approved.
Topic Chosen:
[Describe your topic here, in 5 to 100 words]
1.b Why did you choose this topic? (4 marks)
Why did you choose this topic? Why does it interest you? What do you hope to learn?
Note: While it is, of course, very difficult to get this ‘wrong’, this is a challenge
question, and you will be marked in part (2 of the 4 marks) on how well you
communicate your ideas to the reader.
[Explain why you chose your topic here, in 5 to 500 words.]
2
Question 2: Write a “Backgrounder” for your topic
2.a Background (Regular Question)
Write a short summary of the necessary background to understand the situation.
Assume your target audience is an intelligent member of the general public who has
never heard of your topic before.
Things to include:
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What industry or group of industries are you looking at?
Do we need any extra historical, economic, cultural, scientific, geographic or
political background to understand what’s going on? If so, include it.
Introduce us to the main players (firms, consumers, other affected parties).
Do the firms (and others) see themselves as collaborators, competitors, or
something else? Why?
[Write your background here in 5 to 1,500 words]
Cite the sources used in APA format:
[Cite your sources here]
3
Help and inspiration for writing a background
The following are two excellent, short published backgrounds that you may wish to
draw inspiration from:
Section II. THE WASTE DISPOSAL INDUSTRY on pages 486-489 of
•
Sanderson, M. & Winter, R. A. (2002). “PROFITS” VERSUS “RENTS” IN
ANTITRUST ANALYSIS: AN APPLICATION TO THE CANADIAN WASTE
SERVICES MERGER. Antitrust Law Journal, 70(2), 485-511. Retrieved from
https://www-jstor-org.ezproxy.library.uvic.ca/stable/40843563
In just a few short pages, it tells you everything you need to know about the waste
disposal industry in southern Ontario in order to understand the case being studied.
(This paper is also the assigned reading for Assignment 4).
Section I on pages 397-398 of
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Deutsch, A. (1965). Joint Products and Basing Point Pricing: The Case of
Caustic Soda and Liquid Chlornie. The Canadian Journal of Economics and
Political Science, 31(3), 397-401. Retrieved from https://www-jstororg.ezproxy.library.uvic.ca/stable/139739
An excellent, concise background on the details of the chlorine and caustic soda
industries needed to understand the phenomenon being studied (basing point
pricing). As an exemplar, its main fault is that it doesn’t explain what chlorine and
caustic soda are used for – what gives them value to their purchasers.
4
Question 3: Defining the market
3.a Market definition (Regular question)
What market are you looking at? Use what we’ll cover in class to define the market
using appropriate arguments based on one or a combination of elasticities,
substitutes, hypothetical monopolist tests, critical loss analysis, etc.
[Write your market definition here in 5 to 1,500 words. You’re free to use diagrams
and/or equations if you wish, and those don’t count towards the 1,500 word limit.]
Cite the sources used in APA format:
[Cite your sources here]
5
Help and advice for writing your market definition
Make sure you avoid the cellophane fallacy1: in one famous case from the 1950s, a
U.S. court determined that cellophane and other transparent wrapping materials
were in the same market, because at the current price of cellophane, consumers were
substituting other transparent wrapping materials for cellophane.
The problem? The company that owned the patent to cellophane, DuPont, had used
the market power granted by their patent to raise the price of cellophane far above
its competitive level. The only reason that other wrappings were seen as substitutes
for cellophane was DuPont’s monopoly pricing. If cellophane were priced
competitively, the other wrappings would not be seen as substitutes.
When defining the market, try to think of the market as it would be if the firms you’re
looking at weren’t behaving badly.
Need more help? These sources may prove useful.
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Sections ‘X. Market Definition’ on pages 70-78, and ‘3. Evidence on Market
Definition’ on pages 164-173 of The Law and Economics of Canadian
Competition Policy survey the basic concepts behind market definition.
Some of you may find the discussion of market definition in Chapter 3 of
Motta’s Competition Policy: Theory and Practice to be more readable2.
If you have chosen a topic that involves platform economics or multi-sided
firms, be sure to read Section III. MARKET DEFINITION IN CASES
INVOLVING TWO-SIDED PLATFORMS and IV. TWO-SIDED CRITICAL
LOSS ANALYSIS AND SSNIP TESTS on pages 141-154 of the Platform
Economics Textbook.
For a detailed discussion, see Pierluigi, S. (2001). The Cellophane and Merger Guidelines Fallacies
Again. Retrieved from https://dx.doi.org/10.2139/ssrn.271113
1
Motta, M. (2004). 3-Market Definition and the Assessment of Market Power. In Motta, M. Competition Policy:
Theory and Practice. United States: Cambrdige University Press. Retrieved from https://doi2
org.ezproxy.library.uvic.ca/10.1017/CBO9780511804038.004
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Question 4: Barriers to Entry, Round 1
Note: This is a challenge question because it asks you to work with concepts we won’t
have covered properly in class before the due date. By definition, that exceeds course
expectations. You will be asked to analyze relevant barriers to entry as a required
part of the next research project, so working on this question now could save you time
later on.
Very briefly, barriers to entry are circumstances that make it difficult for new firms
to enter a market or industry. Suppose the firms you’re studying are making massive
profits due to, say, having formed a cartel. What’s to stop a new firm from joining the
party and taking part (or all) of the profits? That’s a barrier to entry.
Sunk costs are a classic barrier to entry. These are, very roughly, important costs
that are in the past for existing firms, but in the future for any new firms thinking of
entering the industry. Suppose the glitter market consists of two producers who’ve
been at it for 50 years. One day, they decide to cooperate instead of compete. Glitter
costs them $0.50/kg to produce, and they used to charge $0.51/kg for it, but now
they’re charging $1.00/kg for it. That’s a big profit!
That big profit attracts the interest of an up-and-coming firm – but they decide NOT
to enter the glitter industry, despite the 100% markup. Why? Because the two
incumbents (existing firms) can produce glitter at $0.50/kg with their existing
factories. The new firm would have to build a factory from scratch, and after taking
those costs into account, it’s no longer worth it. The cost of the factory is sunk as far
as the incumbents are concerned, but not for the new firm. Entry deterred.
There are other barriers to entry, as well. The following two articles (and the pages
from our main textbook) may prove helpful in understanding and identifying them:
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Demsetz, H. (1982). Barriers to Entry. The American Economic Review,
72(1), 47-57. Retrieved from
http://ezproxy.library.uvic.ca/login?url=https://www-jstororg.ezproxy.library.uvic.ca/stable/1808574
Ross, T. (1993). SUNK COSTS AS A BARRIER TO ENTRY IN MERGER
CASES. University of British Columbia Law Review, 27(1), 75-92. Retrieved
from https://heinonlineorg.ezproxy.library.uvic.ca/HOL/Page?collection=journals&handle=hein.journ
als/ubclr27&id=81
The part labeled ‘(a) Section 93(d): Barriers to Entry’ on pages 256-263 of The
Law and Economics of Canadian Competition Policy
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4.a Describe the barrier (5 marks)
Describe what you consider to be the most significant barrier to entry in the market
and situation you are studying. Be specific, and back up your claims with logical
arguments and evidence (from journal articles, etc.). If you really want to, you can
describe more than one barrier to entry, but this is not necessary for full marks.
[Describe your barrier to entry here in 5 to 500 words.]
Cite the sources used in APA format:
[Cite your sources here]
4.b How effective is the barrier? (5 marks)
Explain why the things you list are barriers to entry, and discuss how effective you
believe these barriers would be at preventing entry if it became common knowledge
that the firms you are studying were making unusually high profits.
[Describe your barrier to entry here in 5 to 1000 words. You’re free to use diagrams
and/or equations if you wish, and those don’t count towards the 1000 word limit.]
Cite the sources used in APA format:
[Cite your sources here]
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